An article published by New York Magazine’s ‘The Cut’ attracted a great deal of attention this week. Entitled ‘A Vibe Shift is Coming,’ it asked whether ‘any of us will survive’ a coming change in what’s cool and what’s not. ‘It’s chilling to realize you may be one of the stuck, or if you aren’t, you may be soon,’ author Allison Davis wrote.
What does this have to do with funds, advisors and markets? Possibly nothing! Possibly a great deal. Alex Steger and Alex Rosenberg discuss.
Alex Steger: I thought I was up to speed with all the jargon in finance, but you want to talk about a ‘vibe shift.’ It sounds a bit like a bro-ish term a trader might use but I’m pretty sure that’s not what it is. So what am I dealing with here?
Alex Rosenberg: Basically the idea is that there are cultural moments, and that as one shifts into the other, people inevitably get left behind. As the article puts it, ‘not everyone survives a vibe shift.’ They give the example of someone who came up in hipster/indie culture screaming at people for caring about sneaker brands. People who were once cool suddenly find that they’ve become antiques. Anyway, the article resonated with me because I wonder whether we’re undergoing a vibe shift in finance.
Steger: OK, so I’ve read the piece, and now feel out of touch about both fashion and finance. Great. But, at the risk of repeating myself, what do you mean by saying we might be undergoing a vibe shift in finance? This is a cultural or philosophical change rather than just a new market cycle, right?
Rosenberg: Well, it’s both. Since vibe shifts are much clearer in hindsight, let me start by explaining what I think the last finance vibe shift was (gosh, I didn’t realize how many times I’d have to type the word ‘vibe’ today). Before the financial crisis, ‘greed was good’ was still quoted like gospel. Suits were relatively shiny. There was a belief in both the dominance of genius and of bigness. Hedge funds were getting huge, and people in 2003 were saying things like ‘there’s nothing more alpha than hedge funds.’ The question everyone in finance had to answer was ‘What’s your edge?’ There was a belief that having your money with the biggest and brightest was the best thing you could do. Finance is so lucrative, according one 2006 article, as a result of ‘the knowledge the big firms accrue by being at the center of everything that goes on in global financial markets.’
Clearly this was upended by the financial crisis. The people who believed that ‘Bernie Madoff is a wizard’ didn’t fare so well. Neither did those who bought Abacus funds from Goldman. Protestors started sleeping in Zuccotti Park. A 2012 New York Magazine article called ‘The End of Wall Street As They Knew It’ was full of self-hating quotes like ‘There’s no other industry where you could get paid so much for doing so little.’ For God’s sake, Anthony Scaramucci wrote a book called Goodbye Gordon Gekko.
Through it all, tons of advisors left Merrill Lynch to set up their own RIAs, and many of them ditched suits for flannels.
What changed? The market crashed, of course, and people lost confidence in big financial institutions. But as another quote in that 2012 article said, there was a collective sense that ‘bankers have to go back to first principles.’
I think what this ended up meaning is the primacy of the client – the ‘end client.’ The ‘asset owner.’ People with money were the center of the world, not banks and hedge funds with information. People started talking less about alpha and more about diversification. There was a vibe shift.
Steger: So this gave way to a new vibe. Suits were swapped for fleece vests, wirehouses were swapped for smaller RIAs, expensive funds offering alpha were swapped for cheap funds offering beta, hidden commissions were swapped for (mostly) more transparent fees. Is that the gist?
The cynic in me says this was not all about the client. Yes the client may have benefited, but it was more about finance evolving. It had to be something new post 2008. And many of these changes were driven by regulations, ultimately politics. So the vibe changed, and it was better for the clients, but the vibe shift (it is a jarring phrase to write, I feel like this guy) was driven by the need just to keep the clients. The end goal was still the same.
Rosenberg: I think you’re understating the power of the shift. Before the financial crisis, both fund managers and their clients genuinely thought that letting the ‘Masters of the Universe’ (notice that you don’t hear that term much any more) do their thing was the best thing for the clients. There was a sort of magical belief in genius and in the power of size. Even if you knew that the person managing your money didn’t have your best interests at heart, you didn’t care.
After the crisis, that image was shattered. So clients started thinking more about things like fees and transparency, and money managers realized that they had a point.
Steger: ‘The power of the shift’ sounds like an album by an ’80s hair metal band with a perhaps unhealthy interest in cars. Anyway, I take your point. So things shifted to the world outlined above, and the AUM fee / beta fund model became dominant, helped by a tailwind from markets, for the last decade or so. The age of the star manager was over.
Are you suggesting that it’s about to change again? If so, oh wise one, I have two questions. What’s the new vibe? And also, what are next week’s lottery numbers?
Rosenberg: 86, 75, 309. I think the next shift is happening now. What’s interesting is that rich people have gotten way richer since then. And also many of them are increasingly concerned about social issues. The whole ‘we are the 99%’ really got to a lot of people, I think. ‘Black Lives Matter’ was really salient. ‘Me Too’ caused some actual rethinking. Not to mention that climate change is right outside their doors (their back doors, that is – you know, the ones that open onto the beach).
All of this partially explains the growing popularity of ESG strategies. Now people are talking about ‘stakeholders,’ which is ironically a term for people who don’t own stakes. People seem to be less proud of being rich. Whatever WeWorks remain have sold off their tacky ‘hustle culture’ neon signs. There’s been a big movement toward retiring early. ‘Don’t die rich. Live richly.’ And money managers and advisors, who had just gotten used to the idea of putting the client first, are now hearing those same clients instruct them to put ‘the world’ first instead.
Steger: So this vibe shift is being driven by investors and, as you say, to some degree is driving the growth of ESG in all corners of finance. We’ve gone from Gordon Gekko’s ‘greed is good’ to Larry Fink’s ‘green is good.’ I see what you’re saying. But this is about more than just the rise of impact investing and investing in sustainable endeavors, right?
Rosenberg: It’s very broad. The shift away from ‘look how much we can spend’ parties has already happened, but now you can’t even safely book dinner at a steakhouse – you’d be amazed how many young finance guys are vegetarians these days. Anything overly opulent, anything that smacks of ‘Old Wall,’ has become suspect. In 2015, at the early stages of this shift, a Bloomberg review of Scaramucci’s midtown steakhouse derided it as ‘Hedge Funder Crimes Against Truffles.’ People get left behind.
One person who hasn’t been left behind, and illustrates this shift quite well I think, is Ron Carson. Take this quote from a recent RIA Intel profile: ‘I was an asshole. I didn’t treat people poorly, there was a business agenda — and only a business agenda — about everything I did. But today, I enjoy the softer side of life, the relationship side of life, the people side of life.’ Lower down, he says that ‘All of humanity could benefit from attending [Burning Man].’ And this half-Davos, half-Burning Man ethos is sweeping through finance in all sorts of interesting ways.
Steger: Hmm. Yes, I broadly agree there is a shift, and shaman Ron is an excellent example of how attitudes are changing. If I follow your theory then, the last big shift saw a move to lower fees, more transparency, and putting clients first. And the next one could see more and more money flow to philanthropic causes. This all seems pretty positive, what’s the catch?
Rosenberg: Yeah, I don’t know that there is a catch. Honestly I feel that I’m a little left behind by this shift myself. I’m quite skeptical of ESG, of crypto – of new shiny things that make people feel a sense of ‘togetherness,’ of ‘contributing to something larger than themselves.’ Of ‘Working together to regain trust,’ as a 2022 Davos slogan puts it. Maybe that trust was lost for a reason. Maybe social change is not best effected through the beneficence of the super rich. But does that make the wealthy, and those in finance helping them, bad for trying to help? I guess not. It’s aesthetically a bit off for me. But maybe I’m like the hipster screaming at everyone who’s waiting to buy new Nikes.
I often think about something Matt Levine wrote in relation to an embarrassing bit of bullshit that can be summed up as ‘carbon-neutral natural gas.’ Levine wrote last year: ‘It’s all a little stupid, sure, but it’s how everything works. The point is that when I worked in finance a decade ago, the thing that you did was “let’s use financial products to lower our clients’ taxes.” And now, the thing you do is “let’s use financial products to lower our clients’ emissions.” That’s strictly better!’ He has a point.
Steger: Right. Plus, who wouldn’t want to microdose with Michael Kitces at a conference? Pershing is paying? I’m all in. But seriously, I’m probably not. These do feel like changes for the better – it even appears the fleece vest is on the wane (albeit for another type of vest) – and I have nothing against them. But I am a little skeptical of some of these trends. When I hear asset managers highlight their ESG efforts, I still think it’s more about making a positive impact to their AUM than it is a positive impact to the world. Maybe this is just what it feels like to be left behind?
Rosenberg: You do know the origin of those fleece vests, right? Steve Cohen’s hedge fund, SAC Capital, famously kept the trading floor uncomfortably cold to ‘keep traders alert.’ So traders turned to fleece vests, and the dreaded things spread around Wall Street from there.
The Feds shut down SAC Capital in 2013, and now Cohen is tweeting about his Mets and working from home. ‘There’s no more success. I don’t even know what that is anymore, it’s meaningless to me,’ he said recently. Easy for him to say, sure. But that’s the shift right there.
Agree? Disagree? Let us know what you think – email Alex Rosenberg at email@example.com or Alex Steger at firstname.lastname@example.org.